The M&A landscape in 2021: A global picture - Allen & Overy
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The M&A landscape in 2021:
A global picture
The global M&A market staged a remarkable recovery in the
second half of last year, despite an escalating pandemic and
deep political turmoil. As 2021 begins, we identify the most
significant trends likely to shape dealmaking in the months
ahead and ask: can growth be sustained?
2020 may well go down in history as one of the most remarkable years, including for the global
M&A market.
Brought to an almost total standstill as Covid-19 took hold in the spring, dealmaking staged an
extraordinary recovery from late summer onwards, as cash-laden investors returned to the market
with force. Stock markets around the world underwent what came to be known as the ‘everything rally’,
with prices across most sectors climbing rapidly.
As 2021 gets under way, the question is whether this return to growth is sustainable.
To answer this question we assembled a panel of five of Allen & Overy’s M&A lawyers from around the
world, comprising: Victor Ho, managing partner of the Beijing and Shanghai offices; Khalid Garousha,
managing partner of the Middle East and Turkey practice; Eric Shube, head of U.S. M&A; and Astrid
Krüger and Seth Jones, partners in our Munich and London offices, respectively.
In a session held on 14 January 2021, the panel identified five trends that could either propel or
hamper dealmaking in the year ahead.
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The Biden effect and its implications
for U.S.-China relations
The election of Joe Biden as the 46th U.S. President is expected to herald a change of style
in managing the relationship with China, but it is unlikely to result in a significant change
in substance.
As Victor Ho put it: “While there is much talk about relationships ‘returning to normal’, while diplomatic
engagement is expected to be more conventional, it is important to highlight that very key issues
between the U.S. and China remain unresolved. In fact, four years on, the very important issues
of technology, IP, trade and market access are even more acute. We expect the U.S. position will
essentially be the same although the Biden diplomatic corps will engage differently.”
Eric Shube agreed. “In the spectrum of Trump policies, the one towards China was probably, at least
quietly, supported on both sides of the political divide and the U.S. business community recognised
that what Trump was trying to do was probably overdue. You’d expect Biden to proceed in a more
diplomatic fashion, but I don’t think there will be a dramatic reversal.”
While the level of ‘decoupling’ as reported may be overblown, in the areas of technology and IP this is
expected to remain an area of continuing conflict, with controls imposed by the Committee on Foreign
Investment in the U.S. (CFIUS) and other increasingly stringent national foreign investment regimes
globally continuing to pose challenges to outbound Chinese investment.
Instead, China will increasingly look to markets with lighter regimes, particularly in South East Asia.
However, competition from well-funded investors around the world, willing to pay a high price for prized
assets, will make deals considerably more difficult than in the past. As a result, Victor Ho predicted a growing
focus on domestic transactions, as China continues to transition from an export to a consumer-led
economy and accelerates out of Covid, with the private equity sector within China already ‘very active’.
For multinational investors into Asia, he also detected the emergence of a ‘two city strategy’,
with Hong Kong growing in importance as a gateway to China and Singapore emerging strongly as
a counterbalancing hub for investment elsewhere in the region. Worries about China’s new national
security law do not seem to be deterring companies from investing in Hong Kong.
“It is important to highlight that
very key issues between the U.S.
and China remain unresolved.”
Victor Ho
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FDI controls – the tide moves
(mostly) in one direction
The consistent trend, across many major economies, in recent years towards tighter national
security controls on foreign direct investment (FDI) was only likely to grow, the panel agreed.
However, one region – the Middle East, and particularly the Gulf Co-operation Council states –
was bucking that trend, observed Khalid Garousha.
These countries have historically imposed tough controls on foreign direct investment. However, with Saudi
Arabia having taken the lead several years ago, regulations are being liberalised, including most recently in
the United Arab Emirates where 100% foreign ownership is now being permitted across a range of sectors.
FDI liberalisation may not in and of itself dramatically change the appetite of foreign investors, he noted,
so a number of states are now relaxing social laws in their bid to attract investment and, in particular,
talent. For example, rules on the co-habitation of unmarried couples, certain LGBTQ rights and the
consumption of alcohol have been eased in the UAE in the last month.
“These societal changes would have been unimaginable a year ago and are examples of how far and
how quickly the GCC region is developing and adapting to reflect modern society,” he said.
In addition, the UAE is taking the lead in vaccine deployment. Second globally only to Israel in rolling
out its Covid vaccination programme, the UAE is providing its residents with widespread and relatively
easy access to the vaccine.
A number of states are simultaneously
relaxing social laws in their bid to
attract investment and talent.
The threat of the growing politicisation of FDI regimes remains an issue within the EU and the UK,
which could make the transaction process more complex and perhaps more uncertain, Astrid Krüger
and Seth Jones both suggested.
While traditionally FDI regimes focused mostly on defence-related technology, the definition of what
constitutes critical infrastructure has been greatly widened in recent years, a process only exacerbated
by the pandemic. In Italy, even food sovereignty now falls into this category.
“Almost all European countries have revisited their FDI rules and it’s not finished yet. So there is
uncertainty,” said Astrid, pointing out that Germany, for instance, had been through two significant
amendments to the rules, with a third round now underway. Mandatory filing is now required for all
foreign acquisitions of critical infrastructure.
In addition, the EU is trying to take a more joined-up approach, requiring member states to notify it of
any national security decisions, with the expectation that the systems in individual member states will
become much more like CFIUS.
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“All countries want to keep their sovereignty in making those decisions, but the EU getting involved
could lead to tit-for-tat decisions. It will be far more political and not just based on economic rationality
anymore,” said Astrid.
The UK’s new National Security and Investment Bill may include similar hazards. It requires mandatory
filing across a broad range of sectors and gives the government call-in powers for transactions across
all sectors that might raise national security issues.
“We may not get a clear definition of national security. If national security gets mixed with national
interest, there’s a risk of politicisation of the regime,” said Seth. However, he added that the
government’s language to date had been proportionate, with ministers stressing that they do not
want to impede foreign investment.
Eric Shube pointed to three significant developments in the CFIUS regime: a growing insistence on
mandatory filing with a particular emphasis on critical technology, infrastructure and personal data;
a greater willingness to pursue non-filers; and, as a result of the first two, a greater strain on CFIUS
resources, which means investigations are taking longer. “As a practical matter when you are doing a
deal you have to build in a lot of time for approval because even things that don’t seem controversial
take a long time,” he said.
China is also re-enforcing its takeover controls by using a ‘shield and sword’ approach. This month
(January 2021), it introduced a blocking statute similar to measures in the EU, having already created
the beginnings of a Chinese sanctions regime and strengthened its tech export regime in the wake of
the TikTok controversy, and maintaining strong antitrust controls.
SPAC to the future – a contrarian view
An outstanding feature of 2020 was the extraordinary The real burden falls on those investors that stay on. That has
proliferation of IPOs by Special Purpose Acquisition not been a problem in recent months since, during the
Corporations (SPACs) in the U.S., with many predicting ’everything rally’, there have been some notably successful
that they will spread rapidly to Europe. SPAC transactions with targets trading up strongly.
Eric Shube put the growth into context, pointing out that some However, Eric is cautious about SPACs. “It looks like a great
USD83 billion had been raised through such IPOs during investment, but the track record is quite mixed. In a more
the year, compared with just USD16bn in 20191. With 255 challenging market they are going to struggle to justify the
transactions completed, that adds up to more than one SPAC inherent dilution in the structure,” he said.
IPO per working day in 2020.
A further issue is the volume of SPACs that have yet to find
He added that it was unlikely that the massive growth in the use a target. There were 255 new IPOs in 2020. By contrast,
of SPACs would continue. “I think we have hit peak SPAC. there have so far been only 90 de-SPAC deals – ie SPACs
I don’t think they are going to take over the world,” he said. that went on to make an acquisition2. That means we enter
2021 with an overhang of SPACs trying to find a deal within
Much of their success to date has been down to how they are
the allotted 24 months, and with a relative dearth of assets
structured and to market conditions in the second half of last
being chased by a growing wall of money, this would be likely
year, he argued. They could be more problematic in a more
to force up asset prices and consequently reduce investment
challenging environment.
returns to SPAC investors.
A SPAC is essentially a blank cheque company that raises
There have been a handful of SPAC IPOs in Europe, particularly
money through an IPO to make an acquisition, without a
in the Netherlands. However, Seth pointed out that UK listing
specific target in mind. Usually, under the terms of their
regulations currently make these deals challenging given the
foundation, they have up to 24 months to identify a target
suspension of trading requirements when the M&A deal is first
and do a deal.
announced, although there may be a review of these rules as
The attraction for investors is that it amounts to an offer of free part of the promised post-Brexit review of listing requirements.
money. The proceeds are held in trust, and investors have the
“I’m sure SPACS will look to Europe for targets – they are not
option to pull out if they do not like the eventual target,
going to go away,” said Eric. “But I take the contrarian view of
taking their money with them along with a warrant. It is relatively
whether they will take over the world. It will be one tool in the
risk-free for investors. Sponsors too are well positioned,
toolkit, but they are unlikely to replace PE or strategic investors.”
providing up to 3% of the capital invested but guaranteed to
get some 20% of the equity. Unlike PE deals, sponsors can still
make money even if the eventual acquisition trades down.
Source: Dealogic
1
Source: Refinitiv
2
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New directions for new times –
what will be hot in 2021?
The panel agreed that alternative investment funds would play an increasingly active role in
pushing the market forward in the year ahead.
Seth Jones said private equity would continue to invest in Private to Public (P2P) deals, a trend that
began in 2019 and that was one of the first to come back in 2020 as the market recovered.
Many of the traditional impediments to such deals are no longer such an issue with PE investors,
including the potential to be in a public bidding war or their inability under takeover rules to lock down
a deal at the time of an announcement. Increasingly, we are seeing competitive processes, big-ticket
deals and funds clubbing together to do consortium transactions in the P2P space.
“Most of the big sponsors have done at least one P2P deal in the last two years,” he said.
“There’s such a huge amount of capital to be deployed and all the signs so far this year is that the
momentum is continuing.”
The same picture is emerging across Europe. “This is going to continue in 2021 and there are lots of
rumours about potential targets,” said Astrid. “I think shareholder activism and transformative deals
done in the U.S. are a good example of what could happen here. We usually catch up after a while.”
Khalid said that major GCC sovereign wealth and PE funds would become increasingly active. From March
2020 there was evidence that they regarded the pandemic as a significant buying opportunity.
“The strategy of the GCC SWFs (sovereign wealth funds) is to diversify away from dependence on
petro-dollars and to deploy their capital across multiple sectors, asset classes and geographies and
that will only continue in the year to come,” he said.
The Saudi and UAE SWFs are likely to continue targeting sectors such as technology, infrastructure,
life sciences, foods, agriculture and renewable energy. At the same time, they are increasingly willing
to move away from passive investing and towards taking majority stakes or even full ownership.
An expected increase in distressed deals brought on by the pandemic has not yet transpired as
expected. Such deals may still happen, but the timing is uncertain, argued Astrid.
“We’re still undecided when the wave might hit us. Maybe it will be in the summer or autumn of this
year when life goes back to normal, government stimulus programmes terminate, and the pause in
insolvency filing obligations ends.”
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A bright outlook, but some
potential clouds
The clear consensus of the panel was that the strong growth in transactions at the end of 2020
has continued into the new year and is likely to persist in the months ahead.
Some markets will remain challenging. Chinese outbound investors will remain active but may find the
going tougher. By contrast, inbound and domestic investment is likely to rise. GCC sovereign wealth
funds will be highly active as they look to deploy “eye-watering” amounts of accumulated capital.
Similarly, in Europe and the UK, PE funds will play a prominent role not only as acquirers prepared to
take on bigger and more complex deals, but also on the sell side as they look to take advantage of
rising asset prices.
The year after a U.S. presidential election is usually a time of retrenchment, as the new government sorts
out pre-election efforts to prime the economy. This time it is different, with significant confidence-building
stimulus measures already pledged to repair the economic damage done by the pandemic.
One concern, however, is interest rates. These have started to edge up – most noticeably after the
election result in Georgia handed the Democrats control of the Senate as well as the House. If rates
continue to rise, it will affect asset valuations and could spark a slowdown.
In the UK, currency fluctuations, asset price inflation and more expensive finance could hold back the
growth we are currently seeing, although as Seth Jones observed: “At the moment none of them are
seen as particularly strong headwinds.”
Eric Shube summed up the consensus feeling on the panel about the outlook for 2021. “Right now it
seems all systems are go.”
Contacts
Click on a photo to read their full profile on allenovery.com
Khalid Garousha Victor Ho Seth Jones
Managing Partner – Middle East Managing Partner of A&O LLP Partner – London
and Turkey – Abu Dhabi in Beijing and Shanghai, Tel +44 20 3088 2084
Tel +971 2 418 0470 Registered Foreign Lawyer seth.jones@allenovery.com
khalid.garousha@allenovery.com (California) for A&O Hong Kong
Tel +852 2974 7288
victor.ho@allenovery.com
Astrid Krüger Eric Shube
Partner – Munich Head of U.S. M&A – New York
Tel +49 89 71043 3102 Tel +1 212 610 6366
astrid.krueger@allenovery.com eric.shube@allenovery.com
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© Allen & Overy LLP 2021 This document is for general guidance only and does not constitute advice.
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